Is Inequality Increasing in r-g? Piketty's Principle of Capitalist Economics and the Dynamics of Inequality in Britain, 1210-2013

Abstract

In his 2014 book, Thomas Piketty argues that wealth inequality is sharply increasing in r-g and refers to r>g as ‘the central contradiction of capitalist economics’, where r is asset returns and g is real income growth. To assess whether inequality is increasing in the (r-g)-gap this paper: 1) constructs unique annual data on asset returns for a balanced portfolio and several other variables for Britain over the period 1210-2013, and 2) examines whether the dynamics in the wealth-income ratio, W-Y, and capital’s income share, SW, are governed by (r-g). It is shown that r and g are robust and significant determinants of wealth and income inequality and that they have been the major forces behind the large inequality waves over the past eight centuries.